Question

Saved Help Save & Exit S Check my Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Inc., has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below: Sales (12,800 units * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 384,000 192,000 192,000 214,500 $ (22,500) 5 Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $85,000 per month. If the president is right, what will be the increase (decrease) in the company's monthly net operating income? 3. Refer to the original data. The sales manager is conviced that a 10% reduction in the selling price, combined with an increase of $39,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,500? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $52,000 each month. a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales, b. Assume that the company expects to sell 20,500 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,500 units)? Prey 1 of 3 !!! Next >

Answer 1

1. Contribution Margin Ratio & Break Even in Units & Dollars

Contribution Margin Ratio	Amount $
Sales	384,000
Variable components	192,000
Contribution Margin	192,000
Contribution Margin Ratio	0.50
Fixed Expenses	214,500
Net Operating Income	(22,500)
Break Even Point in Dollars - Fixed Expenses/Contribution Margin Ratio	429,000
No.of Unit sold	12,800
Contribution Per Unit	15
Break Even Point in Units - Fixed Expenses/Contribution Per Unit	14,300

2.Net Increase in Company's Net Operating Income will be $ 35700 than current situation, it came to positive 13200 from negative 22500

Contribution Margin Ratio	Amount $
Sales	469,000
Variable components	234,500
Contribution Margin	234,500
Contribution Margin Ratio	0.50
Fixed Expenses	221,300
Net Operating Income	13,200

3. Company's Net Operating Income will be $ 53700 than current situation

Contribution Margin Ratio	Amount $
Sales	691,200
Variable components	384,000
Contribution Margin	307,200
Contribution Margin Ratio	0.44
Fixed Expenses	253,500
Net Operating Income	53,700

4. Revised Unit Sales will be 15,208

Formula = (Fixed Cost+Target Profit)/Contribution Per Unit = (214500+4500)/14.40

Contribution Per Unit = Selling Price per unit - Variable cost Per unit = ((30 - (15+0.60)) = 14.40.

5. a)  

Contribution Margin Ratio	Amount $
Sales	384,000
Variable components	153,600
Contribution Margin	230,400
Contribution Margin Ratio	0.60
Fixed Expenses	266,500
Net Operating Income	(36,100)
Break Even Point in Dollars - Fixed Expenses/Contribution Margin Ratio	444,167
No.of Unit sold	12,800
Contribution Per Unit	18
Break Even Point in Units - Fixed Expenses/Contribution Per Unit	14,806

5 b)

Option-1 Without Automation
Contribution Margin Ratio	Total Cost without Automation	Per unit Cost without Automation	%
Unit Sold	20,500
Sales	615,000	30.00
Variable components	307,500	15.00	50.00%
Contribution Margin	307,500	15.00
Contribution Margin Ratio		0.50	50.00%
Fixed Expenses	214,500
Net Operating Income	93,000	4.54	15.12%

Option-2 With Automation
Contribution Margin Ratio	Total Cost with Automation	Per unit Cost with Automation	%
Unit Sold	20,500
Sales	615,000	30.00
Variable components	246,000	12.00	40.00%
Contribution Margin	369,000	18.00
Contribution Margin Ratio		0.60	60.00%
Fixed Expenses	266,500
Net Operating Income	102,500	5.00	16.67%

5 c) As per Above Tabel, I recommend to company to go ahead with Automation, because with the Automation, company can achieve more @ contribution level, even in future, if company selling more than 20500 units, company will get more contribution, because fixed cost will be incresaed with increase number unit sale, but decrease in variable cost will contribute to company contribution with the increase number of unit sale also.